Collaboration key to sustainable financing and a just transition

The outcomes of the COP26 summit have elicited mixed reactions, but the agreements reached are broadly seen as a step in the right direction in the global fight against climate change. Encouragingly, all 197 participating countries adopted the Glasgow Climate Pact.

SA’s own recently updated nationally determined contributions, which set out our commitments to keep national greenhouse gas emissions within a specified range, put the country on an ambitious path to contribute to limiting global warming to less than 1.5°C — 2°C by 2050.

In an article published in the Financial Times, President Cyril Ramaphosa provided clarity on SA’s just transition, which aims to ensure groups with limited resources — workers, their communities and small businesses in particular — can take advantage of opportunities brought by our transition to a more sustainable economy.

Finance is a powerful tool in ensuring a just transition. As outlined in the National Treasury’s technical paper on financing a sustainable economy, the financial sector should facilitate a change in investment patterns that preserves and expands investment and economic activity to deliver a just transition, and should prevent a disorderly repricing of incompatible investments.

The Financial Sector Conduct Authority (FSCA) and Prudential Authority — responsible for the stability, integrity and efficiency of the financial sector — will oversee how the financial sector responds to the challenges of a just transition.

Two immediate focus areas will be appropriate reporting and disclosure frameworks, and the development of credible, comparable taxonomy, giving the sector consistent and generally accepted definitions and classifications of green investments. This will contribute to managing the risks associated with carbon-intensive and non-sustainable investments in SA.

Reporting and disclosure

Climate change risk represents a challenge for reporting and disclosure. Risks are likely to be non-diversifiable, correlated and subject to tipping points, meaning things could get bad at the same time in many places. A consistent, comparable and comprehensive description of the carbon intensity of firms’ activities and investment is a fundamental building block to manage such risks and transition the economy to net zero future.

An international benchmark for disclosure was created by the Task Force on Climate-related Financial Disclosure (TCFD), which has been recognised by the Group of 20 (G20) and has prompted many countries to move towards mandatory reporting, including peer jurisdictions such as Brazil and the UK. The International Financial Reporting Standards are likely to build on the TCFD framework by developing a common reporting framework for countries to consider.

Taxonomies to provide returns

To unlock sustainable finance — in other words, financial resources that transition the economy to a net-zero future — a common and agreed understanding is needed of what activities and instruments contribute to our climate change commitments.

Given the interconnectedness of financial markets, a global taxonomy would be most efficient but is unlikely to emerge in the near future. In developing an appropriate taxonomy for SA, we will need to be mindful of developments in other jurisdictions so that cross-border green finance flows are not constrained.

Collaborative approaches to sustainable finance 

SA’s financial sector has taken a collaborative approach to responding to the challenge of sustainable finance. The Treasury has established dedicated working groups bringing together the government, the FSCA the Prudential Authority and industry stakeholders, to tackle the challenges of disclosure reporting and taxonomies, among other issues. The work is co-ordinated by the Climate Risk Forum chaired by the Treasury. A draft green finance taxonomy has been produced and is being consulted upon, and draft disclosure guidelines are imminent.

This consultative and collaborative approach is complemented by the intergovernmental Sustainable Finance Working Group, aiming to co-ordinate public policy and approaches related to the development of financial sector regulatory guidance, standards and requirements. The overlapping membership of the Climate Risk Forum and sustainable finance working group ensures an effective communication and feedback mechanism to industry and other partners.

The global nature of the climate change challenge and financial flows also requires co-ordination with other regulatory and policy authorities regionally and globally. The Treasury, through the G20 and Financial Stability Board, provides this co-ordination at the policy level, while advocating for domestic interests. The Prudential Authority and FSCA are also working closely with relevant international standard setting bodies.

With an eye firmly fixed domestically but fully cognisant of global developments, the Prudential Authority and FSCA are moving quickly to provide regulatory guidance and implement the regulatory changes needed to meet the climate challenge with the single-minded urgency and commitment the moment demands. 

• Naidoo is deputy governor of the SA Reserve Bank and CEO of the Prudential Authority. Kamlana is FSCA commissioner.